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The Importance of Stock Market Returns in Estimated Monetary Policy Rules

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Author Info
Jesús Vázquez () (The University of the Basque Country)

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Abstract

This paper estimates a standard version of the New Keynesian Monetary (NKM) model augmented with financial variables in order to analyze the relative importance of stock market returns and term spread in the estimated U.S. monetary policy rule. The estimation procedure implemented is a classical structural method based on the indirect inference principle. The empirical results show that the Fed seems to respond to the macroeconomic outlook and to the stock market return but does not seem to respond to the term spread. Moreover, policy inertia and persistent policy shocks are also significant features of the estimated policy rule.

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Paper provided by University of the Basque Country - Department of Foundations of Economic Analysis II in its series DFAEII Working Papers with number 200606.

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Date of creation: 01 Jan 2006
Date of revision: 08 Apr 2008
Publication status: Forthcoming in Moneda y Crédito (2007) 224, 197-226.
Handle: RePEc:ehu:dfaeii:200606

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Postal: Dpto. de Fundamentos del Análisis Económico II, Facultad de CC. Económicas y Empresariales, Universidad del País Vasco, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain
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Related research
Keywords: NKM model; stock market returns; policy rule;

Other versions of this item:

Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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